Good morning, ladies and gentlemen, and welcome to the Intact Financial Corporation Q3 2026 results conference call. At this time, note that all participant lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. Also note that this call is being recorded on November 4th, 2026. I would like to turn the conference over to Geoff Kwan, Chief Investor Relations Officer. Please go ahead.
Thank you, Sylvie. Hello, everyone, and thank you for joining the call to discuss our third quarter financial results. A link to our live webcast and materials for this call have been posted on our website at intactfc.com under the Investors tab. Before we start, please refer to slide two for a disclaimer regarding the use of forward-looking statements, which form part of this morning's remarks, and slide three for a note on the use of non-GAAP financial measures and other terms used in this presentation. To discuss our results today, I have with me our CEO, Charles Brindamour, our CFO, Ken Anderson, Patrick Barbeau, Chief Operating Officer, and Achraf Louitri, Senior Vice President, Personal Lines. We will begin with prepared remarks followed by Q&A. With that, I will turn the call over to Charles.
Thanks, Geoff. Good morning, everyone. Thank you for joining us today. Yesterday evening, we announced net operating income per share of CAD 3.63, with a combined ratio of 94%, including 4 points of CAT losses above our expectations. Our top-line growth increased to 5%. This was driven by sequential improvements in personal lines as well as commercial and specialty lines, reflecting continued traction in our growth initiatives. Our operating ROE was 16% despite a 2-point drag from excess capital. This marked the 10th consecutive quarter that our ROE was above 15%. Let me now provide some color on each of our segments, beginning with Canada. In personal auto, our premiums grew 10% in the quarter, including 2 points of unit growth. Our combined ratio was strong at 91.2%, despite close to 2 points more CATs than last year.
Our pricing and risk selection strategy is really working, and we continue to gain market share with premium growth now outperforming the industry for seven consecutive quarters. We outperformed the Canadian market in H1 by 4 points of growth and 5 points of combined ratio. This environment really plays to our strength. In auto, we operate in a market where capacity is fairly tight. Inflation in the past couple of years has been in the mid-single-digit range, driven by physical damage, stable accident benefit- cost equation, but very high inflation in bodily injury liability. This has put a fair bit of pressure on the industry profitability. With product reforms reducing claims inflation and improving affordability for consumers, we expect industry growth in the mid-single-digit range in the next 12 months.
We expect to continue outperforming the industry in terms of growth and to maintain our combined ratio in line with our current performance. We are keen to grow in this environment. In personal property, our premiums grew 7% in the quarter, including 1 point of unit growth. The combined ratio of 105% included 33 points of CATs. Underlying results continue to improve. If you look at the past 12 months, our combined ratio in home insurance was 92.5%, consistent with our sub-95% guidance and close to our 90% average track record in the past decade. Over the next 12 months, we expect hard market conditions to persist, and we are really well-positioned to continue gaining market share in this environment. In commercial lines in Canada, premium growth improved sequentially to 2%. This reflected 4 points from increased units and rates, partly offset by a mix shift towards smaller accounts.
Our game plan to deploy technology, expand our product range, and broaden our distribution, especially in specialty lines, is really paying off. Submissions are up close to 10% in the quarter. With this momentum, we expect to outperform the industry growth in the next 12 months. We delivered a strong combined ratio in commercial as well of 91.9%, despite catastrophes being 7 points higher than expected. Excluding this, the 85% combined ratio was right in line with our five-year average. We continue to target a combined ratio in the low 90s% or better. Moving now to our U.K. and Ireland segment. Our top-line growth improved sequentially and was flat in the quarter, supported by solid new business, particularly in specialty lines.
Over the next 12 months, our quarterly growth rate will be uneven given the dislocation associated with the integration of NIG and the deployment of new pricing models in a competitive environment. But over time, we expect a positive trajectory driven by new product launches, distribution expansion, and continued improvements in broker service. The combined ratio of 94.1% was in line with our view of the current run rate. The U.K. team is executing on the action plan, targeting a combined ratio towards 90%. This will be achieved by accelerating deployment of advanced AI models in pricing and risk selection, modernizing our technology platform, and decommissioning legacy systems, in addition to improving our productivity. In the U.S., growth came in at 3%, driven by our focus on expanding the best-performing verticals. Roughly two-thirds of the portfolio operates sub-mid 80s% in the U.S.
These are the segments which drive our growth, and it is no surprise that we delivered another strong combined ratio of 85.2%, the 13th consecutive quarter below 90%, and 18th consecutive quarter outperforming the industry benchmark. While our objective is to deliver low 90s% or better, over the next year, we expect our combined ratio to be sub-90%. Over that period, we see our top-line growth gaining momentum, driven by doubling down on our most profitable verticals, expanding geographic footprint, in addition to adding verticals such as fine arts, U.S. construction liability, and E&S casualty. Overall, as we look ahead, we are confident that our competitive advantages will help us make the most of a changing environment. With the rapid development of AI being no exception, we firmly see ourselves as relative and absolute winners in an AI world.
We've built our AI muscle in-house since creating the Intact Lab over 12 years ago, and today, we're a global leader in AI in the insurance space. It is, in our view, a tailwind to both our key financial objectives. Over the past decade, we've outperformed the industry ROE by an average of 670 basis points. A third of that comes from pricing and risk selection, and another third from claims and supply chain. Frankly, AI is making them both stronger. Pricing is where it matters the most and where we've been expanding our lead for years. We've built and engineered over the past decades vast proprietary datasets, structured and unstructured, of customer interactions ranging from shopping, claims, in addition to using public and contextual data. Given we're 2 x larger than the next closest competitor, this is a huge advantage.
This is combined with a team of over 600 AI experts using the latest data science to feed our prediction models. Today, machine learning prices 94% of our Canadian personal lines business and 75% of our commercial lines. When including our operations in the U.S. and the U.K. and Ireland, we have more than 600 of our own models in productions. Some believe generative AI will level the playing field. We strongly believe the opposite. Simply put, you can't prompt your way to a sophisticated pricing model without the ingredients that we have at scale. In claims, our second area of outperformance, we spent years internalizing our supply chain. AI multiplies the value of that choice. We handle more than 95% of claims in-house, so we see every step of the claims journey from first notice to final repair. That gives us data no one else has.
It sharpens our fraud detection, reduces indemnity leakage, and helps our adjusters and lawyers close files faster. When a basement floods or a car needs repair, it's our own people and supply chain network, like On Side Restoration and our Auto Service Centres, that get the job done. Frontier models can't replicate that, as this advantage is rooted in the physical world. Now to growth. Over the past decade, we've grown net operating income per share at a 12% CAGR, ahead of our objective, driven by organic growth, margin expansion, and capital deployment. There's no doubt that AI has already expanded our margins, and that'll continue and accelerate. As AI changes how retail customers shop, our distribution advantages become even more valuable. Customers choose insurers they trust based on reputation, reviews, claims experience, and price. I've laid out how we outperform on price.
Then we own Canada's number one and number three brands with Intact and belairdirect, and three out of four customers are advocates. A very strong digital platform, including the country's most downloaded insurance app. Because we own our platforms across brokers, direct- to- consumers, and agencies, we have the optionality to win however customers choose to interact with us. We're obviously actively focused on ensuring we win in LLMs as well as with agents in time. All of this is already translating into financial results. This is not just a promise. We earn today close to CAD 250 million in recurring pre-tax earnings and expect to double that in the next 24 months from our AI deployment, which we measure. We see a substantial runway beyond that.
In closing, Q3 once again demonstrated not only the strength, but also the resilience of our platform to deliver strong growth and outperformance in good and in bad times. Our teams did outstanding work supporting customers through multiple weather events, and I want to thank all of our employees for their dedication and commitment to helping customers get back on track. Thank you, and on that, I'll turn the call over to our CFO, Ken Anderson.
Thanks, Charles, and good morning, everyone. Last night, we reported strong third quarter results, demonstrating the earnings power and robustness of our platform. Net operating income per share was CAD 3.63, our second-highest result for a third quarter. This performance sustained operating ROE at 16%, and at 18% when adjusting for under-leverage and excess capital. Book value per share increased 8% year- over -year to CAD 111.11, and reached double-digit growth excluding AOCI. Let me add some color on the strong performance in the quarter. The overall underlying current accident year loss ratio was solid at 55.4%. Our consistent track record of healthy favorable prior- year development continued, contributing 6 points in the quarter. This was close to our quarterly average PYD over the past two years and broadly consistent with the second quarter.
If you want to estimate near-term PYD levels, our recent experience provides the most relevant guide. Our view remains that the current accident year result and prior- year development should be assessed together when evaluating performance. You also need to keep in mind that we increased the threshold for losses to be categorized as catastrophes on January 1st this year. This keeps close to 1 point of losses in the current accident year ratio in Q3 compared to last year. All in, the combined current accident year and PYD measure is improved year- over- year, reflecting our continued profitability actions. Catastrophe losses were CAD 660 million in the quarter, 4 points above expectations. Over the past 12 months, CAT losses have been close to our CAD 1.2 billion annual guidance. As usual, we will provide our CAT loss expectations for 2027 when we release fourth quarter results.
Moving to expenses. The consolidated expense ratio was 33.9% for the quarter, a small improvement year- over- year. We continue to invest in data, AI, and technology to strengthen our competitive advantages, and in our brands to drive profitable growth. At the same time, we maintain discipline on the overall cost base. We expect our consolidated expense ratio to be at the higher end of the 33%-34% range for the full year 2026. Beyond underwriting, this quarter also highlighted the strength of our diversified and recurring sources of earnings. Operating net investment income increased 5% to CAD 422 million, supported by growth in assets and higher yields. Our reinvestment yield is now 4.6%, 50 basis points above our portfolio book yield. This momentum supports our expectation for net investment income of over CAD 1.7 billion this year, rising to over CAD 1.8 billion in 2027.
Distribution income was another strong contributor in the third quarter, increasing 16% year-over-year to CAD 171 million. BrokerLink delivered solid organic growth and improved margins. On Side Restoration, our countercyclical restoration business, was very active following the recent CAT events and grew revenues by more than 30% in the quarter. We continue to expect distribution income to grow by 10% annually over time. Moving to our balance sheet. We are operating from a position of significant financial strength and flexibility. Adjusted debt to total capital of 16.3% was largely unchanged from the second quarter. Our total capital margin was CAD 3.6 billion, well in excess of what we need to manage volatility and leaving us with significant capacity to deploy capital. During the third quarter, we repurchased approximately CAD 200 million of our shares, bringing total buybacks over the past 12 months close to CAD 600 million.
Current valuation levels, share repurchases represent an attractive use of capital. We intend to remain active while balancing strategic flexibility with our core objective to maintain a strong and outperforming ROE. Our M&A track record over the last decade shows an IRR north of 20%, and the landscape continues to improve. We are sometimes asked about buying back even more shares given how undervalued they are, and the strong shareholder support we can expect to finance an acquisition. In theory, that makes sense, but in practice, there is a limit to the amount we can expect to raise from investors for larger transactions. Therefore, given how constructive the M&A environment is, we are being deliberate about preserving capital for opportunities that can create significant shareholder value. Overall, we continue to deliver on our two financial objectives.
The first is to outperform the industry on ROE by at least 500 basis points every year. We have consistently exceeded this objective with outperformance of 740 basis points in 2025, and an annual average close to 700 basis points over five and 10 years. Our second objective is to grow net operating income per share by 10% annually over time. Here too, we have exceeded the bar, delivering compound annual growth of 14% over the last five years and 12% over the last 10 years. We have all the levers to continue compounding in excess of 10% going forward. First, organic premium growth is supported by an addressable market now 10 x larger than a decade ago, and a robust multi-channel distribution strategy. Second, operating margin expansion is fueled by our industry-leading capabilities in AI and our deep expertise in claims and supply chain management.
These two levers, coupled with continuing to invest in distribution and share buybacks, provide a clear path to compound NOIPS at 10% annually over time. That is before the significant upside from M&A, which, given our track record and the opportunities we see, remains our preferred use of excess capital. We are in a strong position and focused on continuing to deliver long-term value for our shareholders. With that, I will turn it back to Geoff.
Thank you, Ken. In order to give everyone a chance to participate in the Q&A, we would ask that you limit yourself to two questions per person. You can certainly requeue for follow-ups, and we'll do our best to accommodate if there's time at the end. Sylvie, we're ready to take questions now.
Thank you. Ladies and gentlemen, if you do have any questions at this time, please press star followed by one on your touch-tone phone. You will then hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press star followed by two. If you're using a speakerphone, you will need to lift the handset first before pressing any keys. Thank you. Please go ahead and press star one now if you have any questions. First, we will hear from Jaeme Gloyn at National Bank Capital Markets. Please go ahead.
Yeah, thanks. First question just maybe on personal auto, and just wanted to dig into your views of outperformance versus the industry. Saw that the industry outlook lowered just a bit on Alberta reforms, but what gives you that confidence that you'll continue to outperform industry growth rates and deliver still in, let's say, the high single-digit range?
Thanks, Jaeme, for your question. That's exactly right. Our view is that we'll outperform the industry and that the change in outlook is essentially driven by reforms, Alberta, namely, where come January 1st, all new claims will be subject to a new regime. I'll ask Achraf to give perspective on the new Alberta regime, which I think is excellent for Albertans. But what it means in practice is that the severity on all new claims come January 1st will drop meaningfully because we're moving towards an all-care model, and I think that premiums will follow accordingly. That's how the industry works. The cost equation changes, premiums follow, and I think there will be a one-time impact in 2027 because of the deployment on all new claims come January 1st, and that's pretty much the only reason why we have modified our outlook.
Achraf, why don't you give a bit of color on Alberta, and then I'll come back on outperforming?
Yeah, thank you, Jaeme, for the question. That's exactly right, Charles. Maybe first I'll start by saying the reform itself is called Care-First because it puts the needs of Albertans first, and the way it does that is by limiting the tort access allowed, which is crucial in our view to containing the cost and keeping the system focused on care rather than litigation. Consumers will also benefit from not only more affordable and stable insurance prices, but also faster treatment that's focused on recovery and free from the delayed or prolonged legal process. As a result, a bit as Charles, you explained, the reform lowers meaningfully all new claim costs starting January 1st. You should expect to see negative year-over-year claim cost inflation in the province, which translate to lower inflation in total Canada.
This will drive lower rates in the province in 2027, and more importantly, the Care-First reform brings back the system to sustainability after industry lost close to CAD 1 billion over the last two years. In other words, after the one-year reset in 2027, we should expect to see controlled level of inflation. We are optimistic that the reform will have a positive outcome for Albertans, and we remain committed to working closely with the government and regulator to ensure a successful delivery.
Yeah. I think, Jaeme, the issue in Alberta is that it was so litigated that you had massive amounts of cash settlements, a big chunk of which didn't go to injured parties. I think the government took the bull by the horn and basically said, "We will put all the resources towards getting Albertans back on track following an accident." Very good reform in my mind, not only for victims, but for all drivers in Alberta, and I think that everybody benefits in that context. We're very positive on the outcome for Albertans. If you look more specifically at the inflation equation that we're operating under now, pre-reform, there's probably three elements in there you want to think about. The first one is the inflation, call this mid-single digit, now anchored in physical damage inflation. We don't think that's going away.
Liability inflation, driven by a number of provinces, Alberta being the biggest one, was double digit. At the other end, accident benefit as a product across the land hasn't shown much inflation. So, in aggregate, you're in the mid-teens. Alberta's tackling the high inflation.
Mid-single digit.
Sorry, did I say mid-teens? Oh, no, mid-single digit. Alberta's tackling the high inflation. There'll be this one-time impact in 2027, hence the change in outlook. The product they're putting in place will also contain inflation, prospectively. Now, you've seen us, over time, shrink our market share as people were behind on inflation. As people are now catching up, we've outperformed now by close to 4 points in the recent past. It's still a tight pricing environment. We're putting our brand to work, our service to work, our digital channels to work, and we don't see the outperformance changing in the near to mid-terms.
That 4% was Canada overall, or?
Yeah.
Just to clarify. Yeah.
Canada overall.
On this same theme, perhaps you can relay it over to personal property as well, if bundling is a component of this, of course. Looking at policies in force growth, unit growth, still kind of in the 1%-ish range. Is it really Alberta and pulling back on Alberta that has been a drag on seeing acceleration or further or higher growth rates in that unit perspective? Is this something we could see start to inflect now that Alberta is back online and you are broadly more comfortable with the pricing environment?
The in-force picture is a lagging indicator. I think your written unit growth is, in my view, a more relevant indicator. We have good growth in most of the markets in which we operate, at different level. We pick our spots depending on the health of the market. Clearly, as we saw these reforms heading in the right direction in Alberta, as the industry was really in a real tough spot, being a leader in the marketplace, we chose to grow in that environment. I think this turned out to be the absolute right call. I do not know, Achraf, if there is anything else to add on that.
No, I think Jaeme touched on the bundling.
Oh, the bundling.
Bundling.
Yeah, why don't you comment on that?
It's relatively stable. It has been stable, slightly higher than 50% in both products, slightly higher on the personal property than personal auto. I think to your point, Charles, the unit growth is at 1.5% year- to- date, is in that zone, is in that range. Of course, there are areas where we're more careful, and others where we're more bullish from a growth, but overall, that has been stable since the start of the year.
Yeah. The bundling, a big thing at our end. I think, depending on the province and the line of business, you are in the 50%, but there are provinces where it is close to 70%, actually. And it has been a good retention tool for us.
Thank you.
Thank you.
Next question comes from John Aiken at Jefferies. Please go ahead, John.
Good morning. In terms of the combined ratio in U.K. and Ireland, we've seen in previous quarters some large losses negatively impacting that, but we saw improvements this quarter. Was there a fundamental shift that we saw in the quarter, or were there actually some tailwinds that helped the combined ratio this quarter?
Ken?
Yeah, sure. No, look, fundamentally, John, you look at the performance in 2024 and 2025, you see an average of 94%. I think last quarter, we called out that what we saw in terms of large losses in the second quarter was very much anomalous. Our view was that the underlying performance was sub-95%, and that's what you're seeing in the third quarter. That's our view of where the performance is, and I think absent a surprise, we would anticipate in the near term being in that zone. So no excess or unusual large loss activity in the third quarter, and nothing unusual to call out. I think the performance in the third quarter reflects our view of where we are today.
To be clear, our objective is to push towards the 90% combined ratio in the U.K., and that action plan is focused really on two main areas. Firstly, on the loss ratio, rolling out and embedding the pricing sophistication across that portfolio fully, which should bring 1-2 points of loss ratio improvement. On the expense ratio side, we know we have a gap to peers in the zone of 3 points, and over the next 36 months or so, the aim is to improve particularly the technology cost in the U.K., where we're embedding new technology, but until it's fully embedded, you can't switch off the existing technology. So you end up with an outsized technology cost in the near term, and that's what we're working hard on over the next three years.
Ken, can you remind me how long you think that process is going to take in terms of the conversion of the technology?
Yeah, I think we talk about the outer end around 36 months, so that's our view today. In terms of the performance, though, clearly 2027 should be better than 2026, particularly given the first half of 2026.
Yeah. So, I mean, we've been deploying new systems since last year. There are multiple products and lines of business in that region, CL as well as SL. And the challenge is that RSA had multiple legacies. We don't operate like that, so we're unpicking those one by one. And while we're deploying technology now, your policies need to have migrated before you can get rid of the old technology, hence the 24- 36 months window.
Thanks for the color. I'll requeue .
Thank you.
Next question comes from Tom MacKinnon at BMO Capital. Please go ahead, Tom.
Yeah, thanks very much. I wonder if you can give some color with respect to what you are seeing with commercial lines. Largely in Canada, you have talked about pressures in some of the bigger accounts, but not necessarily in SME. Why do you believe that is the case? As we continue to see rate pressure in North America on commercial lines, when do you expect that theme to dip into the SME in Canada, and if you don't, why?
Yeah. No signs of that in the SME space, Tom. You are seeing retentions north of 90%, very stable. Some of the metrics are even improving in that space. When it comes to price change per se, you are seeing almost mid-single-digit price changes in that space, very steady. It is a growing portion of our portfolio, Tom. That is why I have talked about the 2 points of mix shift downward in our remarks. It is a sign that we are growing in that space at a much faster clip than we are for larger accounts, where we are shrinking. We are not seeing a migration. I don't know, Patrick, if there is any color you want to add there.
No, that is right. When you combine rates and exposure, we are really on the mid-single digit for SME and for a good portion of mid-market as well. So no change. It has been quite stable around that for many quarters now.
Yeah. Tom, that would be consistent with what we've seen in the past 25 years. I'd like to talk about before that, but we were not as present people around the table today. But certainly, it feels very much like what I've seen before, and maybe a little bit better.
What's the mix in terms of net premiums for commercial lines in Canada between large and SME?
I think we say in commercial lines in Canada, you're looking at 80%—
Yeah.
—to 80+% is in the SME mid-market space.
SME mid-market.
And [mid- market].
Yeah.
Okay, thank you.
Next question comes from Doug Young at Desjardins Capital Markets. Please go ahead, Doug.
Hi, good morning. I just want to go back to the Alberta reform and the personal auto. It sounds like the claims inflation and the benefits you get kind of happen January 1st, and pricing gets adjusted over the next year, and then earned premiums will be reflected. Are we going to go through a period actually where you get margin expansion through 2027, a bit of 2028, and then it kind of stabilizes? Because it seems like that might be the case, but I just want to understand that. Is that what you saw with the Ontario reforms as well?
I think that what we're seeing, Doug, is you look at our performance to date, it's a very good indicator, combined ratio-wise, of what to expect next year. It's at the lower end of what we call sub-95%. That's why we're specifying what to expect next year. I think in aggregate, at the industry level, clearly the performance of the industry is unsustainable in Alberta. That's why there were capacity issues. People didn't want to be in Alberta or grow in Alberta. I expect the overall loss of the industry in that province to shrink at the industry level as inflation comes down, and that will be translated into better premiums for Albertans.
When it comes to us, I feel like looking at the performance right now is probably the right way to think about our performance next year, which is better than mid-90s%, but I don't want to telegraph margin expansion, no.
No, specifically about Alberta, if you were alluding to a potential mismatch between the timing of where the cost benefits would happen and the premium, both will be aligned.
Yeah.
There won't be a mismatch there.
Yeah.
Okay. It's not like the cost comes down immediately and the earned premium coming through or the reduction comes down later. That's more matched through 2027.
Yeah. I think we're in the last stretch before the reforms become effective, but think in symmetric terms here. That's probably the best way to think about it.
Okay. I had some on the U.K. and Ireland, but I think most of that's been answered. But on the U.S.—
Yeah
—It feels like you are more optimistic on both the margins and the growth over the coming year and maintaining your combined ratio in around mid-80s% or below 90%, I think is what you said. I mean, what gives you the confidence, given obviously the competitive trends? You talked about new products, you talked about distribution relationships. What is really kind of turning that confidence to be more positive on the outlook in the U.S.?
I think it is the fact that the growth is all coming from the best lines of business. As I mentioned in my remarks, you have almost two-thirds of the portfolio that operates sub-mid-80s%, and that is where the bulk of the growth is coming from. So at the very basic level, just simple math, we feel good about the way we are building the U.S. business, and we are investing in teams, and we are deploying new products. Obviously, the products we pick are products that will be accretive to our performance. Patrick, I don't know if there is additional color you want to
No, that is why some of the new lines that you have talked about as well, fine arts, E&S casualty, are just starting, so I think they will gain momentum as well to support the top line. That is why we see an acceleration in top-line growth, while maintaining very good profitability in 2027.
Yeah. We have got 12 verticals in the U.S., Doug, and we can really calibrate the growth where we want, and that is what we have been doing, and that is working well. I am pleased with that. I mean, it is surprising to me that we are outperforming the specialty lines benchmark in the U.S. by 7 points of combined ratio and growing marginally faster. I think the denominator is not huge, and therefore, it is easier to grow in that space. Ken, did you have any color you wanted to add there?
No, but as you also said in your remarks, we've had 13 quarters sub-90% combined ratio, and in the recent past, it's mid-80s%. So, the confidence in maintaining that is sub-90% for the next 12 months is fairly strong.
Yeah. The lines where there's most competition, Doug, I mean, there are lines where performance is really good. I'd say what we call special property, large property accounts, there's good performance there, no doubt, but prices are down double digit. We're shrinking that portfolio even though we love that business. That goes to why growth was only 3 %-ish in the quarter, but the engine can generate more than that.
Appreciate the color. Thank you.
Thanks.
Next question comes from Bart Dziarski at RBC Capital Markets. Please go ahead, Bart.
Great. Thanks for taking the questions, and good morning. I wanted to ask around the AI benefits you mentioned and the prepared remarks scaling to CAD 500 million. How should we be thinking about that falling to the bottom line versus reinvesting over the next two years? I think you mentioned it could grow beyond CAD 500 million past that. So, what could those benefits scale up to? Thanks.
Patrick?
Yeah. We anchor where we put our investments in AI with the financials of the business. That's why our top priority is still to invest a good portion of AI into the pricing and risk selection area. That's the first order of priority. The second one is improving customer experience, so reducing cycle times in claims and accelerating our service to brokers and clients in the quoting and renewal process. The third objective is a multiplier to the first two, which is AI can really accelerate the speed at which we build and deploy software, and we build a lot of software ourselves, so that's the third area of priority. Finally, the fourth one is efficiency gains, especially in the non-customer-facing areas, given the second pillar will tackle that.
So, when we go from close to CAD 250 million today to CAD 500 million, it's probably around 60% of that that will still be in more than the loss ratio, and then the other part will help the expense ratio. We want to continue to invest in AI going forward, so that will fund some of it, but we definitely think it will expand our combined ratio outperformance over the next two years. Yeah.
I would say, Bart, when I look at the combined ratio outperformance where the AI deployment is the greatest, the expansion of the outperformance is bigger than what we measure, to be clear. The numbers we're talking about are the numbers we measure, control sample versus the rest. So, I think this is clear margin expansion here. It's not just a theoretical number that will disappear by higher spending in other parts of the organization.
Okay, got it. Thanks. That's very helpful color. The tone sounds a lot more constructive on M&A opportunities. Maybe just a capital allocation question. How should we think about the pace of buybacks going forward? With respect to M&A, where are those opportunities that seem to be accelerating, if you will? Any color there would be great. Thanks.
Ken, do you want to provide some color?
Yeah. Look, the balance sheet, as I've said, is in an excellent position. Leverage, debt capital, just over 16%, CAD 3.6 billion of capital margin. So clearly, a lot of flexibility. Our shares are undervalued. We're active on the buyback. We've deployed CAD 200 million in the quarter. We will continue to be active, but as I said in the remarks, we're also balancing that with an attractive M&A environment. We're conscious of the ROE drag that comes from maintaining the flexibility, but we're also looking at a range of opportunities, and some of those opportunities are large. Large opportunities could require large equity raises, and that's where there's a limit in terms of the capital markets debt to the equity that you can raise. In that context, having the dry powder increases the overall scale of M&A that you can do.
There's transactions that can involve issuing shares to the target, and that also creates a different dynamic in terms of how much equity you can raise from shareholders. So, those are considerations that we factor into the balancing of buyback and retaining that flexibility. You can expect us to continue to be active when we see the shares undervalued.
Correct. Assume the pace that you've seen in the last quarter continues. But this theoretical idea that you should be more aggressive because you'll have shareholder support when you issue shares, in practice, depending on the size of the transaction, there's a limit for that argument to be true. 200-point drag on the ROE is big, and our first financial objective is ROE outperformance. So in practice, what we're doing now is we're shooting ourselves in the foot by 40% of the objective. If we didn't have a very good reason to calibrate what we're doing the way we're doing it now, we wouldn't be doing that. We'd be more aggressive.
Very helpful. Thanks for taking the questions.
Next question comes from Paul Holden at CIBC. Please go ahead, Paul.
Thank you. Good morning. Sorry, another question for you on Alberta. But just thinking of the, again, the sequencing of the profit improvement, and Charles, you're very clear for new claims as of January 1 will be under the new regulation. Just wondering how we want to think about prior claims and how they're working through the system. Obviously, those will develop over time, so could continue to be somewhat of a drag on margins. How long does it take for that to roll off, I guess is really my question?
Well, these are long- tail type claims, right? You should think three years, four years, duration-wise, that is the weighted average time of cash flows as opposed to the actual maturity. I think, Paul, I would just highlight our PYD track record in personal automobile insurance, which I know people tend to discount, which I personally think is really important, and should be looked at with current accidents here. There would be drag from those only if there was no caution on our balance sheet. I would argue that there's caution on our balance sheet, so it's really not on the list of the risks that I'm concerned about. Achraf, is there any additional color?
Nothing else to add.
Okay. Understood. That's helpful. Thank you for that. Charles, you were talking about, I think, 4 points of outperformance versus the industry on personal auto, and I think that was a reference to premium growth. If I think about your premium growth being 10%, suggest the industry's 6%, then you have the Alberta drag coming next year, so 6% goes to something lower. Am I thinking about that correctly? Just again, in terms of that math and industry growth heading into next year.
Yeah, I think the industry, I mean, it varies. The industry's growth varies by quarter, but I think directionally, it's probably a good way to think about that. Yes.
Okay.
We think we will continue to outperform.
Understood. Okay. I guess those are my two questions. Thank you.
Thanks, Paul.
Next question comes from Mario Mendonca at TD Securities. Please go ahead, Mario.
Good morning. I want to go back to the M&A discussion. Both Charles and Ken, you made reference to a deal being large, so large in fact that the equity market wouldn't fund it. There would be some limit on how much the equity markets could fund. The moment I heard you two say that, my first thought was, "Well, what's large then?" What is a large deal for Intact? Is it like a CAD 5 billion deal, a CAD 10 billion deal? Just size what large means in this context.
I think in this context, large means north of CAD 15 billion, in terms of size. I mean, that's where the equity component would get up into the upper single digit of billions, and that's where the combination of cornerstone and a bought deal would be probably getting to the upper bound of what's doable.
Yeah. So CAD 15 billion you're talking. Yeah.
I think CAD 10 billion is large, CAD 15 billion is where you push all the levers to the max.
Mm-hmm. That's 1/3 of your market cap. Yeah. CAD 15 billion. For those keeping track, CAD 15 billion is 1/3 of your market cap. That's meaningful. Yeah. And just the, perhaps it's something we can take offline. I just want to pursue this a little further. The next thing I wanted to ask about was, you said, Charles, in your comments that you expected U.K. and Ireland to be choppy going forward. I guess I want to understand what you mean by that. First of all, did I understand you correctly? You meant that profitability in U.K. and Ireland could be choppy going forward?
No, no, top line.
Top line could be choppy. You mean top- line growth could be choppy. Okay. As in, like, is there a seasonality thing you want to point us to? Is there particular quarters where it'd be soft? What are you referring to?
I think that what goes in the top- line equation in the U.K. and Ireland is two things. You have the U.K. commercial lines platform, and then you have the London market and specialty lines platform. The growth in specialty lines and London market and Europe tends to be choppy. It's good, it's positive. Sometimes it's very high, sometimes it's not as high. Then, when you look at the U.K. commercial lines market, sometimes you get off accounts in the delegated authority space, for instance. Sometimes you deploy a pricing and risk selection algorithm in a product. When you do that, it creates a bump. You put all that together. It's not like there's a straightforward trajectory.
That's why I'm saying, from a top line point of view, which is different from how you earn, and therefore combined ratio, but from a top line point of view, you can have bumps in the road, yes.
Yeah, that's very clear. Thank you.
Next question comes from Brian Meredith at UBS. Please go ahead, Brian.
Yeah, thanks. Charles, you mentioned earlier in your comments about how AI is going to affect, I guess, customer kind of shopping, and clearly these AI personal agents could have an impact. I'm just curious your view on how this will roll out, potential impact to the industry, and particularly focused also on your distribution, right? Is there risk here that we're going to see some disintermediation within your distribution system from these?
I think when you look at our distribution system, Brian, one of the things we've done starting more than 10 years ago is we have built two of the strongest brands in the Canadian marketplace, including our broker-distributed offer in personal lines. Intact Insurance is the number one P&C brand in the country. Yes, it is distributed by brokers. It is distributed also by our own brokers, which is as large, if not larger, than a number of the direct insurers in the country. It has a digital channel, unlike many broker-distributed business, supported by a strong brand, which competes and rivals any direct digital channel. I think that, look, people do price, product, experience, discovery through LLMs. Agents will come. Fundamental, in my view, is the quality of your digital experience and your digital channel.
Our digital channels, wall-to-wall, cover our distribution footprint, because we've invested in putting a digital experience, Intact-branded, on top of the broker channel. I think there'll be pressure in some parts of the distribution channel, especially where a broker might not have scale. But I think between our brand, our digital channel, and then the pricing sophistication in personal lines, we're in really good shape to make the most out of that environment. As I said, in distribution, in the broker channel, we own a broker that has close to CAD 6 billion of premium in the Canadian marketplace, a bit bigger than our direct business, which has CAD 5 billion. Therefore, we feel that we've got really good optionality, but also a digital offer that cover all parts of our distribution footprint, and I think that is key.
That's why we're doubling down on our digital channel.
Appreciate that. Thank you.
Thank you.
At this time, we have no other questions registered. I would like to turn the meeting over to Geoff Kwan.
Thank you, everyone, for joining us today. Following the call, a telephone replay will be available for one week, and the webcast will be archived on our website for one year. A transcript will also be available on our website in the Financial Reports section. Of note, our 2026 fourth quarter results are scheduled to be released after market close on Tuesday, February 9th, 2027, with the earnings call starting at 11:00 A.M. Eastern Time the following day. Thank you again, and this concludes our call.
Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. At this time, we ask that you please disconnect your lines. Enjoy the rest of your day.